Legion Partners increases active stake in OSPN to 6.8% (from 5.6%); 4Q 2020 results due February 23rd

• Yesterday, after the market close, Legion Partners filed an updated 13D indicating its stake in OSPN had increased to 6.8% (from 5.6%); the additional ~440K shares were purchased between 1/4/2021-1/26/2021 at prices ranging from $20.85-$24.44 per share.
• For context, in November 2018, Legion disclosed a ~5% position (purchased at prices ranging from ~$16.60-$17.95) in a 13D that broadly asserted the shares were undervalued. In August 2020, Legion, then a ~5.6% holder (at an estimated average price of ~$18 per share), issued a public letter to OSPN’s Board recommending: (1) improved financial disclosures (and guidance); (2) a strategic review to evaluate the divestment of OSPN’s hardware segment; (3) a strategic review to evaluate the monetization of other assets (e.g. OneSpan Sign); and (4) the resignation of T. Kendall Hunt, the company’s founder and former chairman/CEO, from the Board.
• Legion has, to date, been successful in obtaining improvements in financial disclosure (seemingly with more to come) as well as the “retirement” of Mr. Hunt. As well, while making no specific commitments, management indicated on the 3Q 2020 conference call that it would “take a look” at options for the Hardware business, which would, at the very least, include some operational streamlining, in terms of product set and headcount. Additionally, while the company stated that it “looks at our portfolio of solutions constantly trying to really assess what is the right way for us to maximize value’” it also added that it would not be “appropriate” to publicly discuss “private M&A activity” (and that the hardware remained an “important business” for OSPN).
• OSPN expects to report 4Q 2020 results after the market close on February 23 with a conference call that evening at 4:30 p.m. (ET).
• Our fair value remains $32 per share, which values OSPN’s Hardware business at 2.5x 2022E EBITDA, applies sales multiples of 1.0x and 8.5x to the company’s legacy/non-recurring licensing and core/recurring software & services businesses, respectively, and accounts for ~$120 million of projected net cash.

EVRI discloses above-consensus preliminary 4Q 2020 results in connection with a potential repricing transaction of first lien debt; fair value increased to $16 per share (from $12 per share)

• Today, in connection with a potential “favorable” repricing transaction for $735.5 million of its first lien debt (due 2024) EVRI disclosed some preliminary 4Q 2020 financial metrics, which were modestly above our expectations and consensus.
• Specifically, EVRI projects 4Q 2020 sales will be $117-$121 million (compared with consensus of $114.25 million, $112.1 million in 3Q 2020 and $145.2 million in 4Q 2019) with adjusted EBITDA of $60-$62 million (compared with consensus of $59.5 million, $59.8 million in 3Q 2020 and $63.2 million in 4Q 2019).  The company expects a net loss of $0.3-$1.4 million, including $1.5 million of facility consolidation and inventory write-off charges (compared with the consensus loss expectation of $0.5 million and losses of $0.9 million and $4.1 million in 3Q 2020 and 4Q 2019, respectively).
• Previously, EVRI had indicated that it expected 4Q 2020 net income and adj. EBITDA would be in-line with 3Q 2020 results, implying a better than the seasonally normal sequential decline.  As well, management has commented that above historical levels of profitability were expected to persist into 2021.
• Anecdotally, the management indicates that free cash flow is expected to be “triple” the $4.5 million generated in 4Q 2019.
• For context, EVRI ended 3Q 2020 with net debt of $1.095 billion (vs. $1.13 billion in 2Q 2020) and a net leverage ratio of 6.1x (vs. 6.2x in 2Q 2020). Notably, EVRI’s debt covenants have been waived or modified through 3Q 2021.
• Our fair value estimate is increased to $16 per share (from $12 per share; see Exhibit #1 on page 2), reflecting a blended multiple of ~9.5x (previously ~8.5x) on 2022E EBITDA of $261.5 million (previously $248 .5million) as well as net debt of $1.1 billion. [Note: our adj. EBITDA forecasts do not add back stock-based compensation.]

Fair value increased to $80 per share (from $67) on TFII’s pending purchase of UPS Freight for $800 million; close coverage, as of today’s market bell

• Today, TFII announced an agreement to acquire UPS Freight, the less-than-truckload (LTL) division of United Parcel Service (NYSE: UPS), for $800 million in cash.
• UPS Freight provides LTL services throughout North America via a network of 197 facilities, of which 147 are owned, and a fleet of ~6,350 tractors and ~23,500 trailers. (Roughly 90% of the acquired business will operate independently within TFII under the new moniker TForce Freight.)
• In 2020, UPS Freight is expected to generate ~$3.15 billion of sales with an adj. operating profit of ~$39 million (or a 1.2% operating margin) compared with sales and EBIT of $3.265 billion and $75 million, respectively, in 2019. (For context, we expect TFII’s current LTL business to generate ~$775 million of sales with operating income of $105 million in 2020.)
• TFII indicates that the deal, which is expected to close in 2Q 2021, will be “accretive” to 2021 EPS although its longer-term focus will be on improving the businesses profitability toward the levels currently enjoyed by its legacy LTL business.
• By our of calculation, TFII’s trailing leverage ratio will be ~2.5x at closing (albeit roughly 2.0x based on 2021E adj. EBITDA).
• Based on our initial revised forecasts for 2021-2022E, fair value is increased to $80 per share (from $67 per share; see Exhibit #1 on page 2).
• That said, with the stock trading in-line with our revised fair value (and the near-term focus likely to be squarely on integration/execution) we prefer to maintain a disciplined approach and withdraw our recommendation, as of today’s close. However, we will continue to monitor TFII for an opportunity to re-recommend the shares in the future.
• For context, TFII shares returned 220.5% since our initial recommendation in June 2017, compared with a 58% increase in the S&P 500 and 55% rise in the Russell 2000.

VRNT to Complete the Spin-Off of Cognyte Software on February 1, 2021; Raise FVE to $75, Downgrade to NEUTRAL

• Verint Systems Inc. (NASDAQ: VRNT) will complete the spin-off of its cyber intelligence business on February 1, 2021. The new standalone company will adopt the corporate moniker Cognyte Software Ltd.
• VRNT shareholders of record will receive one share of Cognyte Software for every share of Verint held as of January 25, 2021. Shares of Cognyte will begin trading on the NASDAQ on February 2, 2021, under the symbol “CGNT”.
• We adjust our fair value estimate to $75 per share (from $62 per share) on revised estimates to account for F2020 results and increased valuation multiples to reflect the current peer trading environment.
• We now forecast the parent company (consumer engagement) to generate $987 million in revenue and $286 million in EBITDA in F2022. We fairly value shares of post-spin VRNT at $58 per share based on a 15x multiple of our EBITDA estimate and incorporating $483 million in net debt and 65.7 million shares outstanding.
• Cognyte Software is fairly valued at $17 per share, which is derived by applying a 12.0x multiple to our F2022 estimated EBITDA of $92 million, incorporating $28 million in net cash and 65.7 million shares outstanding (based on a one-for-one share distribution ratio).
• Given the limited upside to our revised fair value estimate we downgrade shares of VRNT to NEUTRAL (from BUY). Shares of VRNT have increased 36.4% since our initial report on October 20, 2020, versus an increase of 9.6% in the S&P 500 over the same period.
• Our initial BUY recommendation included the expectation that the healthy discount at which VRNT shares traded versus peers would narrow. With shares now trading at 14.7x the consensus 2022 EBITDA estimate (versus 10.6x at the time of our initial report), we believe the risk reward scenario for owning shares has become more muted and suggest waiting for post-spin share pricing to potentially present a more compelling re-investment opportunity.
• For more details, please refer to The Spin Off Report dated October 20, 2020.

UFS to sell its Personal Care division to American Industrial Partners for $920; proceeds being used to repay $600 million of debt and repurchase $300 million of shares; transaction expected to be completed by the end of 1Q 2021; close coverage of UFS, as of today’s close 

• Today, Domtar (UFS) announced an agreement to sell its Personal Care (PC) division to private-equity firm, American Industrial Partners (AIP), for $920 million (compared with our roughly $1 billion initial valuation).
• By our calculation, the sale price represents multiples of ~7.1x and 6.9x on 2021E and 2022E segment EBITDA projections, respectively.
• The deal is expected to close by the end of 1Q 2021 and proceeds are expected to be deployed toward $600 million of debt repayment (compared with the company’s net debt load of $881 million at the end of 3Q 2020) and the repurchase of $300 million worth of shares (which, at ~$37 per share, equates to more than 8 million shares or almost 15% of the current outstanding share count).
• Notably, with the sale of the PC division completed we view the standalone Pulp & Paper (P&P) business, which is in the process of repurposing a portion of its assets toward the attractive packaging sector, as a likely takeover target in amid on-going industry consolidation.
• Based on the aforementioned sale price/proceed usage framework, our fair value estimate remains ~$37 per share, reflecting a multiple of 5.0x (previously a blended ~5.7x) on 2022E adj. EBITDA of ~$392 million (previously ~$514 million) and projected net debt of ~$220 million (previously $875.5 million).
• That said, with shares indicating up near our fair value estimate in pre-market trading this morning we prefer to maintain a disciplined approach and withdraw our recommendation, as of today’s close.
• For context, UFS shares increased 41% since our initial recommendation in September 2020 (compared with a 17.5% gain in the S&P 500 and a 44% rise in the Russell 2000).

LNDC reiterates F2021 guidance; refinances credit agreement, which includes language governing potential spin-offs and asset sales, through 2025; fair value increased to $12.50 per share

• LNDC posted 2Q F2021 consolidated sales down 8% to $131 million (vs. consensus of $134 million) with adj. EBITDA of $8.7 million (vs. consensus of $8.8 million and $887K in 2Q F2020). Adj. EPS were $0.02 (vs. consensus of $0.03 and a loss of $0.17 per share in 2Q F2020). Curation Foods (CF) showed further improvement but Lifecore, where EBITDA rose 29% to $7.3 million, was again the clear standout.
• LNDC reiterated F2021 guidance, which calls for consolidated sales of $530-$550 million with adj. EBITDA up 50%-68% to $33-$37 million. Anecdotally, the company still expects that CF will achieve a steady-state gross margin of 11%-14% by the end of F2021 (versus 8.35% in F2020 and 9.4% in 2Q F2021) and that Lifecore’s gross margin would be ~38% for the full year (modestly below normalized levels of ~40%).
• By segment, at CF, LNDC expects F2021 sales down 10%-13% to $437-$453 million, including a ~$55 million reduction in its legacy vegetable business, with adj. EBITDA of $12-$14 million. At Lifecore, sales are forecasted to rise 8%-13% to $93-$97 million with a 12%-22% increase in adj. EBITDA to $22.5-$24.5 million.
• LNDC ended 2Q F2021 with net debt of $168 million (vs. $190 million at the end F2020) and a net leverage ratio of 5.2x (vs. 8.8x in F2020).
• On December 31, 2020, LNDC refinanced its credit facilities with a $170 million term loan (at LIBOR plus 850 bps) and a $75 million line of credit (at LIBOR plus 225 bps), which both mature at the end of 2025. The blended average interest rate is expected to be ~7.5% and annual interest expense will increase by ~$6 million (albeit with an offsetting increase in cash flow in F2021-2022 due to reduced principal payments). The leverage ratio covenant starts at 7.0x and decreases incrementally to 4.0x in February 2025.
• Interestingly, the credit agreement, as described in Section 6.5 (c) on page 126, allows for equity awards “in anticipation of a spin-off of Lifecore as well as language defining a “Permitted Curation Sale” (on page 48). For its part, management indicates that it continually works with the Board to “enhance and create shareholder value”.
• Our fair value is increased to $12.50 per share (from $12 per share) based on a blended multiple of 11x on F2022E EBITDA of ~$46.5 million (previously $44 million) and net debt, incl. Windset, of ~$145 million (previously $150 million).

MDP sells Travel + Leisure brand to WYND for $100 million; sees 2H 2020 political advertising of $165 million (versus previous commentary suggesting ~$143 million); fair value increased to $17 per share

• Today, MDP announced an agreement to sell the Travel + Leisure brand to Wyndham Destinations (NYSE: WYND), the timeshare business that spun-off Wyndham Hotels in 2018, for $100 million. (Notably, upon expected closing in February 2021, WYND will re-brand as the Travel + Leisure Co. and be listed under the ticker TNL.)
• Notably, Meredith, in an effort to maintain journalistic integrity, will continue to operate (and monetize) the T + L brand’s media assets via a 30-year, royalty-free licensing deal (which, per management, results in no impact to MDP’s P&L.)
• Separately, at an investor conference this afternoon, Meredith management indicated that it expected political advertising revenue in 2H 2020 (which is MDP’s 1H F2021) would total ~$165 million (compared with its previous commentary, which did not include the run-off race in Georgia, of ~$143 million, and the ~$65 million that was spent during the last presidential cycle in F2017).
• As well, the company indicated that its estimated cash balance at year-end 2020 (or MDP’s 2Q F2021) was ~$350 million (compared with $201 million at the end of 1Q F2021). While net debt reduction remains MDP’s top priority, management indicated that the achievement of its 2.0x leverage target (versus 4.9x in 1Q F2021) is not a pre-requisite for the restoration of a dividend payment.
• While today’s data points are incrementally positive, and we continue to discern clear trends toward consolidation in both the Publishing and Broadcasting industries (as well as towards the separation of those types of disparate assets) it remains our contention that a transformative transaction is not a near-term likelihood at MDP, and we discern a dearth of incremental value creation potential from current trading levels.
• That said, our fair value estimate is increased to $17 per share (from $15), reflecting a blended multiple 6.2x on blended F2021/F2022 adj. EBITDA of ~$536 as well as projected net debt of ~$2.5 billion (previously $2.58 billion). 

DD Begins Exchange Offer For Split-Off of N&B Business; Maintain NEUTRAL Rating and $65 FVE on DD; Maintain BUY Rating and $150 FVE on IFF

• DuPont Inc. (NYSE: DD) has begun its exchange offer for the split-off of its Nutrition & Biosciences (N&B) business, which upon separation will merge with International Flavors & Fragrances Inc. (NYSE: IFF) in a Reverse Morris Trust (RMT) transaction.
• DuPont shareholders are permitted to exchange all or a portion of their DD shares for shares of N&B common stock at a discount of 7% to the per share value of IFF stock, with an upper limit of 0.7180 shares of N&B stock per DuPont stock.
• DD shareholders who elect to exchange their shares are expected to receive approximately $107.53 of N&B shares for every $100 worth of DD tendered. N&B shares will be converted into shares of IFF on a one-for-one basis following the expiration of the tender offer. If the tender offer is not fully subscribed, the remaining N&B shares will be distributed to DD shareholders on a pro-rata basis.
• The tender off is set to expire at Midnight January 30, 2021, and the merger is expected to be completed on February 1, 2021.
• Post-merger IFF can be fairly valued at $150 per share; we rate the shares a BUY.  With the post-merger company’s market position strengthened by a presence in key growth markets (e.g. probiotics, protein solutions), coupled with the potential to extract further cost synergies, we see the potential for improved growth and profitability going forward. While COVID-19 remains a concern, it should be noted that approximately 85% of IFF’s portfolio serves end markets that remain in high demands with COVID-19, including food, beverage, hygiene and disinfection.
• On a pre-spin basis, shares of DD are fairly valued at $65 per share. With the fair value estimate representing modest downside to DD’s current share price, we rate the pre-spin shares a NEUTRAL, owing to concerns over continued top line weakness and potential risk to forward estimates. While the spin-off makes strategic sense, the divesture of this high-margin business will reduce the company’s profitability going forward. Additionally, ongoing litigation with Chemours Co. (NYSE: CC) over liabilities linked to PFAS remains an overhang for the shares. Post-spin, shares of DD can be valued at $36.
• For more details, please refer to The Spin Off Report dated August 20, 2020.

Tribune Publishing receives takeover offer of $14.50 per share from its largest shareholder, Alden Global, which values the company at ~5.0x 2021E adj. EBITDA

• In a 13D filed on December 31, 2020, Alden Global Capital disclosed that it had delivered a preliminary, non-binding letter of intent (LOI) to the Board of Tribune Publishing (NASDAQ: TPCO) offering to purchase the company for $14.25 per share (or an ~11% premium to TPCO’s closing price on December 30^th of $12.79).
• For context, Alden Global is Tribune Publishing’s largest shareholder, with a ~32% stake, and controls three of its seven Board seats.  As well, Alden owns the MediaNews Group, a privately held concern that controls ~60 local newspapers, including the Denver Post and the Orange County Register. (Synergistically, Tribune owns newspaper publications, such as the New York Daily News, the Chicago Tribune and the Baltimore Sun.)
• By our calculation, Alden Global’s bid values TPCO at ~5.0x its 2021E adj. EBITDA guidance of $105-$113 million, which is relatively in-line with the average seller price in recent M&A deals of ~4.6x. More broadly, we would note commentary by media investment bank Oaklins DeSilva + Phillips, which indicated that the average sale of a metro U.S. newspaper has historically commanded a valuation of 3.5x-4.5x EBITDA as well as a report by Fulcrum Financial, which evaluated 14 private purchases of periodical publishing companies between 2007-2012 that garnered median EBITDA multiples of 3.7x.
• While we continue to discern clear trends toward consolidation in both the Publishing and Broadcasting industries (as well as towards the separation of those types of disparate assets) it remains our contention that neither type of transaction is likely on the near-term horizon at MDP nor that any potential deal would unlock significant incremental value for the current trading level; indeed, our estimates continue to suggest that shares could be overvalued (or at least at risk of entering a period of underperformance).
• To that end, we maintain our fair value estimate of $15 per share for MDP, reflecting a blended multiple 6.2x on blended F2021/F2022 adj. EBITDA of ~$536 million as well as projected net debt of ~$2.85 billion (see Exhibit #1 on page 2).

ALERT: IAC to Spin-Off Vimeo

On December 22, 2010, IAC/InteActiveCorp. (NASDAQ: IAC), before the market open, announced that the company’s Board of Directors has approved a plan to spin-off its Vimeo business. The transaction, which is expected to be tax-free to IAC and IAC shareholders, is targeted to be completed in 2Q 2021, contingent on shareholder approval at a stockholder meeting to be held in 1Q 2021, among other customary regulatory requirements.

IAC, a media and internet conglomerate with a long history of value-unlocking transactions (e.g., Expedia, LendingTree, Ticketmaster HSN and most recently Match) controls majority stakes in publicly-traded ANGI Homeservices (NASDAQ: ANGI), a digital marketplace for, among other things, home repair and maintenance. As well, IAC operates a variety of other privately held businesses, including Vimeo, Dotdash, Care.com (acquired in February 2020), Mosaic Group, The Daily Beast, Bluecrew, Ask Media, and IAC Films. (Note: IAC’s Chairman, Barry Diller, via his 100% ownership of the Class B common stock, controls more than 40% of the company’s voting power.)

Vimeo is a “global video platform that allows professional, small and medium sized business, organizations and enterprises to connect with their audiences, customers, and employees.” The platform is offered as a cloud based Software-as-a-Service (“SaaS”), which enables customers to create, host, stream, and monetize their video product across platforms and devices. Vimeo operates under the brand names Vimeo, Magisto (acquired in 2019), and Livestream (acquired in 2017).

In 2019, Vimeo generated $196 million in revenue (4.1% of IAC revenue including the since seperated Match Group revenue; 7.2% of revenue excluding Match) and generated an adjusted loss before interst, taxes, depreciation, and amortization of $41.8 million. 2019 Vimeo revenue increased 23% as subscribers increased by 30% in the year (to year end 1.2 million) and a 10% increase in revenue per subscriber (benefited from the mid-year Magisto acquisition). The 2019 loss was 49% higher than the prior year on increased marketing expenses. Through 3Q 2020 Vimeo operated with an adjusted EBITDA loss of $12.7 million. Of note, in 3Q 2020 Vimeo increased revenue by 44% as subscribers increased to 1.46 milllion and the business operated profitably on an adjusted EBITDA basis ($3.4 million in the quarter) for the first time.

As background of IAC’s historical seperation of subsidiaries and market commentary on future potential seperation, investors may note that in August 2019, IAC’s chief financial officer, Glenn Schiffman, indicated that the company had begun to explore the potential separation of MTCH and ANGI. Subsequently, in October 2019, the company indicated that a preliminary proposal for a tax-free separation of MTCH had been presented to the Board and that it would not further evaluate options for its ANGI stake until the aforementioned transaction is completed. More recently, in December 2019, the company formally announced that it would separate MTCH in a tax-free transaction that was completed on July 1, 2020.  Presumably, the completion of that transaction, per IAC’s prior commentary, will allow management to turn its attention toward the potential separation of ANGI.

PRELIMINARY VALUATION

The company, as it stands today, operates under the following reported businesses: ANGI Homeowner services (IAC recognized $1.3 billion in revenue and $130.8 million in adjusted EBITDA through 3Q 2020), Search ($430.9 million in revenue and $34.4 million in adjusted EBITDA through 3Q 2020), Emerging & Other ($320.6 million in revenue and a loss of $30.6 million through 3Q 2020), Vimeo ($199.4 million in revenue and a loss of $12.7 million through 3Q 2020), and Dotdash ($19.5 million in revenue and $35.3 million in adjusted EBITDA through 3Q 2020). It should be noted that the current year to date individual business performances have been negatively impacted by the COVID-19 pandemic, in particular the ANGI business.

Following the separation, IAC will essentially become a holding company for the ownership position in ANGI Homeservices Inc. (NASDAQ: ANGI), with the remaining operating businesses having generated approximately $891 million in revenue and $39 million in adjusted EBITDA (prior to corporate expense of $115 million) through 3Q 2020.

In terms of valuing Vimeo, it is worth noting that in conjunction with IAC’s 3Q 2020 earnings release, it was disclosed the company had raised $150 million at Vimeo, which implied an enterprise value of approximately $2.75 billion for the subsidiary. We approach the valuation of pre-spin IAC on a sum-of-the-parts basis given its varying businesses and public holdings and view it as appropriate to present differing scenarios based on the individual business valuations. If shares were to be valued at the current share price of ANGI and Vimeo valued at the equity investment, including net cash of $2.5 billion, shares of IAC would be fairly valued at $125 per share, which likely is the lower end of where shares could potentially trade.

In a more forward-looking valuation, given equity investment are typically done at a discount to intrinsic value, the price paid could be extrapolated to future growth of Vimeo. The $2.8 billion implied valuation equates to roughly 14x 2019 revenue. Assuming Vimeo annual revenue growth of 25% through 2021, which is reasonable given the current growth trends, and applying a 14x multiple implies a Vimeo valuation of $4.3 billion. Incorporating this Vimeo valuation, and increasing the estimated share price for ANGI based on the current consensus target, implies a fair value estimate of $149 per share.

Lastly, we incorporate the remaining operating businesses within the parent. In 2019 these businesses generated $46.8 million in adjusted EBITDA (including corporate expense). Assuming a normalized market multiple of 11.0x, those operating businesses would be valued at roughly $515 million. Including these businesses into the fair value estimate would raise the FVE to $155 per share. Of note, in a more bullish scenario, which would include 10% EBITDA growth and a 16x multiple (inline with the current S&P forward multiple), the fair value estimate would increase to $160 per share.

Shares of IAC currently trade at $183.61 having increased near 15% in morning trading following the spin-off announcement. While we acknowledge that the assumptions laid out above can and should be challenged, we struggle to see significant value left to be unlocked over and above where shares are currently trading.